What are offset mortgages?

Offset mortgages are linked to one’s savings or current account.

08:31 15 July 2013

An offset mortgage is one of the options being offered to borrowers. This type is linked to either savings or current account. As a result, you pay less interest on your mortgage but you don’t earn interest on your savings.

Let me give you an example; if you have £150,000 mortgage and you have £35,000 in savings offset against it, you’ll only pay interest for the difference, which is £115,000.

 

However, some lenders will calculate your mortgage payments based on the full amount of the money that you borrowed. If they do so, you’ll be over paying each month. This will help you not only in reducing the interest but also in paying off your mortgage quickly.

Some lenders will let you reduce your monthly payments though but this will not shorten the loan term.

One great advantage of offset mortgage is that it can be extremely tax efficient. Typically, you are charged tax for the interest you make on your savings account (not your ISAs). If you opt to get offset mortgage, you don’t earn interest so there’s no tax to pay.